Sponsored Links

To retire by age 45, start with a plan.

"Is early retirement the right financial choice?" Jim Ellis discusses long-term financial growth strategies. I have blogged ab...

Past blog posts now load week by week. The old style created a problem for some as the system would load 50 blog posts each time. Hope the new style is better. Search archives in box below.

Archives

"E-book" by AK

Second "e-book".

Pageviews since Dec'09

Recent Comments

ASSI's Guest bloggers

BREXIT and 1H 2016 income from S-REITs.

Monday, June 27, 2016

My income from S-REITs in 1Q 2016 received an enormous boost from Saizen REIT's distribution which was partially a return of capital. I said I had mixed feelings about the matter and, actually, it has created another issue for me. 

Cash as a part of my portfolio is now quite large.

Is this a problem?

Of course, keeping some excess money in savings accounts and fixed deposits is always a good idea. These are our war chests. 

However, too much cash (earning too little) and we won't be able to keep up with inflation which is one reason why we invest for income. We want to beat inflation or, at least, keep up with it. We don't want to see our wealth eroding.

To be quite honest, I am in no hurry to re-invest all the distribution received from Saizen REIT in 1Q 2016. 

Approximately, I received 8 years worth of "dividends" (in the guise of capital gain) at one go. So, I have quite a bit of time to wait for good investment opportunities. 


In the meantime, some of my cash is in OCBC 360 and UOB ONE, with most of my cash getting 0.8% to 1.9% in interest income from savings accounts and fixed deposits which are virtually risk free.

However, being mortal (and fallible), I couldn't help but nibble a bit at some S-REITs in 2Q 2016.

1. Cambridge Industrial Trust. I have been holding to a much reduced position in this REIT for many years and in 2Q 2016 decided to make a small addition to my position at 52.5c a unit. 

To be quite honest, I feel that AIMS AMP Capital Industrial REIT is probably a more attractive investment. The two REITs have comparable yields but AIMS AMP Capital Industrial REIT has a stronger balance sheet and a business strategy that leaves less to the imagination. 


However, I decided to go with Cambridge Industrial Trust this time because my investment in AIMS AMP Capital Industrial REIT is already quite big.


2. I-REIT Global. I only became an investor after some time from the IPO which I thought wasn't attractively priced enough and I added to my investment in the REIT last August at 65.5c a unit. 

I decided to nibble at 71c a unit in 2Q 2016 because even at that price, the distribution yield is still pretty attractive. I also like the REIT for its portfolio of German freehold office properties and their high quality tenants.

If BREXIT should spark a contagion, I would become a lot more cautious in adding to my investment in the REIT as its income is in Euros although having real estate in Germany, arguably Europe's strongest economy, I feel that there is some degree of stability.


3. Soilbuild REIT. I decided to add to my investment in the REIT which has seen a large decline in unit price due to issues with one of their tenants, Technics Offshore Engineering, which did not pay their rent.

The REIT has since been paid the firm's bank guarantee of $11.85 million by UOB. This is equivalent to 18 months of rental and it will give the REIT time to search for a new tenant.

In arriving at a price which I am more comfortable to buy at, I noted that the rent payable by Technics is almost $8 million a year which is about 10% of the REIT's revenue of $80 million a year. 


Assuming the REIT is unable to find another tenant after 18 months, without taking into consideration other costs, DPU would decline by 10% accordingly. So, happy with the distribution yield at 73c a unit back in December 2015, with the latest development, I decided that I would only add to my investment at 66c or so a unit.

Together, these nibbles used up less than 10% of the distribution I received from Saizen REIT in 1Q 2016. I think it is important to put them in perspective. They are really only nibbles.

S-REITs are leveraged income instruments. So, it won't be wrong to say that I remain wary as to how rising interest rates in the future could impact distributable income negatively, all else remaining equal.


There isn't anything retail investors like me can do but to be more conservative when it comes to debt and investments which depend largely on debt to bring home the bacon especially if growth is not particularly promising.

However, thanks to BREXIT, interest rates are likely to remain low in the near future and the most disadvantaged in the financial world are probably still the savers. In the search for higher yields, S-REITs are natural beneficiaries.



So, how much bacon did I receive from my investments in S-REITs in 1H 2016?


S$ 397,294.28

S-REITs remain relevant instruments for the income investor and I will continue to keep an eye on them, buying more of the ones I like if Mr. Market should go into a depression.


Related post:
1Q 2016 income from S-REITs.

24 comments:

tong said...

tot u retired? still got mthly salary credited for uob n ocbs 360? or u working a uber driver part time with yr new hybrid car?

AK71 said...

Hi tong,

I don't have monthly salary crediting but I can still get higher interest fulfilling other criteria. Hey, thanks for the idea about being an Uber driver to fulfill the monthly salary crediting criterion. I didn't think of that. ;p

tong said...

so wat the other criteria? can share?

AK71 said...

Hi tong,

I blogged about this before. You might be interested in this blog post:
http://singaporeanstocksinvestor.blogspot.sg/2015/04/uob-one-account-or-new-ocbc-360-account.html

H said...

Hi AK,

Thank you for sharing your thoughts. While weak global economic growth may translate into lower interest rates (good for reits), I was wondering why you bought into Industrial reits in 2Q2016, considering the slowing Singapore manufacturing sector plus upcoming industrial space over-supply. Commercial reits face the same over-supply in grade A office, so I was wondering if Frasers commercial trust which has more grade-B office would be less affected. Appreciate your thoughts!

Warm wishes,

H

AK71 said...

Hi H,

It would be a mistake to dismiss all industrial S-REITs as weak and I also believe that all investments are good at the right price (or approximately the right price). ;)

I added to my investment in Cambridge Industrial Trust because the price came down a lot to a level which I think is reasonable, giving a distribution yield which is more attractive and probably sustainable. Their strategy to look outside Singapore, specifically to Australia, for growth is something I agree with too as the weaker Australian Dollar presents opportunities for buyers.

As for Soilbuild REIT, a big portion of their portfolio is made up of business parks. This is an advantage compared to other industrial REITs in their class. Business parks are in higher demand and the supply is more limited.

FCOT has business parks as well as grade B office buildings. Deriving about half of its income from Australia, the weak Australian Dollar has been a drag on its performance but I believe unit price is reflective of this. NAV/unit: $1.53. Gearing: 36%. Interest cover ratio: 4.6x. I am invested in the REIT and have been in the queue to add to my investment, hoping for an 8% distribution yield. Maybe, I shouldn't be so greedy. ;p

Kim said...

Hi AK
What do you think of the entry price now for Cache Logistic Trust @$0.84 ? Can share your thought on this ? Thank you :)

AK71 said...

Hi Kim,

Declining DPU is due to losing master leases and lower occupancy rates. Gearing level is almost 40%. The REIT kept doing private placements which led to dilution and is a reason for the lower DPU as well.

With 2 more master leases converted to multi tenancies, operating cost would go up while income takes another hit. DPU is likely to decline from here which makes the relatively high distribution yield unsustainable. A normalised distribution yield would probably be lower.

Buy only if we are comfortable with this.

AK71 said...

On my FB wall:

Tay Yu Wen:
"Hi AK, Are you not worried about their latest purchase of the bukit batok connection? Looks like theres going to be form of rights issue to fund the acquisition. I dont like how the form of financing was not address in their presentation. Next, this type of building comes with high ceiling, which results in alot air space wastage. It is relatively hard to rent out. I sold this reit immediately after they released this news. Doesnt look good in the near future. What are your thoughts?"

Assi AK:
"I guess you are referring to Soilbuild REIT. They did say that they will be using debt or perpetuals or both to fund the purchase. So, it will be DPU accretive. It will be leased back to the sponsor for 7 years with annual rental escalations. I quite like the idea."

redponza said...

Hi AK,
Thanks for your self talking :)

For Soilbuild, their gearing has been quite high, so adding another property to the portfolio seems quite risky.

On the other hand, their DPU is decreasing in Q1 2016? This seems not a good sign.
What do you think?

I found that AK does not have position in China focused REIT (like Capita Retail China, Mapletree Greater China), is this due to macro concern of China economy? If not for macro concern, they seems to be growing much faster than local REITs...

AK71 said...

Hi redponza,

Debt isn't a bad thing per se. If the proposed acquisition goes through, the REIT's gearing level goes to 40% which is still within the 45% maximum allowed. As long as the REIT is able to generate meaningful income from the acquisition, what we have is good debt.

The DPU reduction is due to a decline in occupancy. I think this is a story that will continue in the industrial property space for a while. Gaining a 7 year Master Lease with this latest acquisition, fully funded with debt, will be DPU accretive.

China? I like. I was a shareholder of PCRT and also CapitaMallsAsia. I blogged about these too. If prices come down for REITs with Chinese exposure, for example, CRCT, I might buy some. For now, my plate is quite full where REITs are concerned. ;)

redponza said...

Hi AK,
Thanks for your reply. I have studied REIT performance during GFC.
If I am not mistaken, those REIT which required big capital injection in GFC (thus causing large share dilution) were mainly heavy in debts with high gearing before the crisis.

Hence to prepare for the worst, I think it is prudent to avoid high gearing counters?

For industrial REIT, I may not be deep into the individual counters enough to really tell the difference. But seems AIMS AMP is performing better than the other industrial REIT in terms of occupancy, DPU growth (!), lower gearing. So AIMS AMP may have the higher quality here, while Soilbuild has higher yield. Every investment is good in the right price, but how high of a yield should we seek in a lower quality counter is more of art than science.

Mapletree Greater China is a wonderful REIT with both high yield (over 7%) and good DPU growth (high single digit) if you do not mind the macro and high gearing. So I would say it is actually the best REIT in the current environment.

AK71 said...

Hi redponza,

The GFC was a credit crisis. The genesis of each crisis is different as the market learns. These days, we see standard response from central banks is to print money to stimulate economies which means another credit crisis is unlikely. The next crisis would probably have different reasons.

Actually, those REITs that got into trouble in the GFC was not due to high gearing level but due to difficulty in accessing credit.

In an environment of loose monetary policies, as long as cash flow remains relatively strong and predictable, a gearing level of 40%, reasonably priced should be OK.

Oh, AIMS AMP Capital Industrial REIT is my largest investment in the S-REITs universe. It is so large that it would not be prudent for me to add to my investment. Like I said, it is probably a better investment compared to Cambridge Industrial Trust and, you are right, when compared to Soilbuild REIT too.

Thanks for sharing with me your thoughts on MGCCT. I will keep an eye on this to add to my portfolio when Mr. Market goes into another depression. ;p

Bjorn Ng said...

Hi AK71,

Very interesting read! I myself am looking into investing myself into REITs (I am a newbie investor; only got about 4 lots in STI ETF). Just started working for a month now and saving up to put in an amount into REITs, but I'm still looking at what REIT I should enter.

I've been reading a lot about different things to look out for and such, but I always end up forgetting it or not understanding it fully as well.. I was wondering if you could shed some advice for me as to what REITs should a newbie consider, and what parameters should I look out for as well?

Thank you!

AK71 said...

Hi Bjorn,

Alamak. I don't give advice de. I am only talking to myself here in ASSI.

I have been talking to myself about REITs for years. So, do a search and you should find the answer or bits of the answer you are looking for.

The "Search" box is at the top right area of my blog. I have also compiled various blog posts on REITs. You will find them in the right side bar of my blog.

Gambatte!

Kevin said...

Hi AK,

Strong set of 2Q 2016 earnings by IREIT Global. I guess the share price will go up sharply tomorrow.

Currently, all its properties are 100% freehold and its current WALE is 6.4 years with almost 100% occupancy rate. I guess the only minus point is its gearing of 43%?

Any idea on when to go about buying REITS other than the link shown below? At the moment, I can't seem to get it right for REITS ;P

http://singaporeanstocksinvestor.blogspot.sg/2012/12/reits-when-to-buy.html


Do hope you can share some pointers or some guide on where to look for the relevant information.

Thanks!

AK71 said...

Hi Kevin,

I get asked for a template on investing from time to time. There probably isn't any hard and fast template that I use. You can see the my blog posts on REITs scattered throughout my blog but I tried to organise a few of these in the right side bar for ease of reference. ;)

Often, I have different considerations for different REITs and Trusts. If you would like to see I-REIT as a case study, go to the bottom of this blog post and look for the "IREIT" label and click on it. You will see me anyhow talking to myself. ;p

MON said...

hi AK,

any comments on the PO by soilbuild?

AK71 said...

Hi MON,

I like buying a fairly priced building that generates a meaningful level of income which has visibility for many years to come. I am participating. :)

AK71 said...

The manager of Soilbuild Business Space REIT, has announced the launch of an issuance of about up to 94.4 million new units in Soilbuild REIT through a preferential offering exercise to its existing unit-holders.

Each unit is priced at 63 cents, representing a discount of 8.2% to the volume weighted average price of 68.65 cents per unit for trades on Thursday.

When completed, the offering will raise gross and net proceeds of $59.4 million and $59.2 million respectively.

The group says that the net proceeds raised will be used to partially finance the proposed acquisition of Bukit Batok Connection. The total acquisition cost, including acquisition- related expenses, is expected to be about $100.5 million.

Lim Chap Huat, Executive Chairman of Soilbuild Group, has committed to take up his pro-rata entitlement, and to undertake to apply for any excess unsubscribed new units, up to the limit of 29.3% of the total issued units following the Preferential Offering.

Source:
http://www.theedgemarkets.com.sg/sg/article/soilbuild-reit-raise-594-ml-through-preferential-share-offering

Notes:
1. Issue of 94,353,672 new units in Soilbuild REIT on the basis of 1 New Unit for every 10 existing units in Soilbuild REIT.
2. Initial annual rental of 2 Bukit Batok Street 23 is $8 million.

AK71 said...

SB Reit Management announced on Wednesday that its preferential offering to raise S$59.4 million through the issue of about 94.4 million new units received "overwhelming support from unitholders".

SB Reit Management said that at the close of the preferential offering on Monday, the valid acceptances and applications for excess new units received amounted to about 164.6 million new units, representing about 174.4 per cent of the total number of new units offered pursuant to the preferential offering.

Roy Teo, chief executive officer of SB Reit Management, said that the successful completion of the preferential offering, in conjunction with the unsecured banking facility from the Bank of East Asia (Singapore), has provided "sufficient funding" for the acquisition of Bukit Batok Connection.

SB Reit Management also noted that Lim Chap Huat, the sponsor of Soilbuild Reit, has "only" subscribed for his pro rata entitlement of approximately 23.7 million new units to maintain his existing unitholding and was not required to subscribe for any excess new units under the preferential offering.

Source:
http://www.businesstimes.com.sg/companies-markets/soilbuild-reit-944m-preferential-offering-oversubscribed

ianlim8829 said...

Hi AK,

What do you think of Far East Htrust at the moment? Their p/b ratio seems rather attractive @ 0.65 and a gearing of 33% seems rather safe to me as compared to the industry's standard.

AK71 said...

Hi Ian,

When I invest in REITs and Trusts, I am interested in income. FE H-Trust has found it challenging to maintain its revenue and it is likely to face more downward pressure.

I am not sure if the valuation of its assets is too aggressive. If they should be valued downwards, the discount to book will reduce and the gearing will go up. These numbers are not set in stone.

I might be interested if its unit price were to decline by another 10% or 15%, everything else remaining equal.

AK71 said...

SINGAPORE (Jan 26):
DBS Group Research has upgraded Cambridge Industrial Trust to a "buy" rating with a higher target price from 54 cents to 60 cents, after the REIT had a change of sponsor to e-Shang Redwood.

DBS' analyst Derek Tan noted that Cambridge's new sponsor is a logistics developer and operator in North Asia and believes that there could be greater synergies between the two entities going forward.

Monthly Popular Posts

 
 
Bloggy Award